R Sheet: Water Markets

In the coming decades, water scarcity will be a major challenge for the western United States. However, the current restriction of water only to “beneficial uses” exacerbates the problem. However, water markets can do much to help cope with these challenges.

Markets promote frugality. When water is scarce, users must reduce waste, make do with less and find substitutes. The price of water serves as a signal to users about its scarcity. However, when water prices are kept artificially low—as is often the case—people act as if it is plentiful and are less likely to conserve. By contrast, higher prices create incentives for individuals and businesses to find more efficient ways to meet their water needs.

The ability to sell “saved” water also provides a substantial incentive to use water more efficiently. When every unused gallon represents a potential profit opportunity, the incentive to find new ways to conserve water increases dramatically. Finally, water storage can be used as insurance to protect against extended dry periods.